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Taking the initiative

FOR YEARS NOW, difficult relationships between manufacturers and distributors have been like the weather — everybody talks about it, but no one…

Yet now some companies are doing something about it, based on some of the input from the March 2 bonus session designed to update the industry on NTEA's manufacturer-distributor relations initiative.

The goal of the initiative is simple: Get manufacturers and distributors to work together for their mutual benefit. But how?

As part of the initiative, NTEA began a series of four regional meetings in 2003. The sessions attracted 159 attendees, split almost evenly between manufacturers and distributors. The meetings were made available free of charge to NTEA members. Another round will be held in 2004.

Consultant Robert Nadeau conducted the meetings and also led a special session at The Work Truck Show and NTEA convention in Baltimore. The session in Baltimore recapped what Nadeau presented in the regional meetings, provided manufacturers and distributors an opportunity to share how they have changed the way their companies do business, and gave a preview of what else might be offered in the future.

Vic Tedesco, NTEA president and president of Zoresco Equipment, reported that his company has changed as a result of the meetings.

“In the past, I saw very few manufacturer reps,” he said. “This is not meant to be critical, but many reps are not capable of sitting down with the owner of a truck equipment company and developing a business plan. But top-level management can, and I have received commitment from top management of four of our major manufacturers this year. The meetings we have had with them have been totally different from anything we have done before. Together, we built a business plan. We set actions and objectives that are based on exchanging information. Now I work closely with these manufacturers. I consider them partners.”

The meetings have given Zoresco Equipment and its manufacturers a way to eliminate duplication of effort and to define clearly the roles and responsibilities of both parties.

“We have changed our marketing, and the changes allowed us to lower our costs,” Tedesco said.

Based on research

Nadeau has made multiple appearances at NTEA events, including an extended session during the 2002 convention and the four regional meetings that concluded in January. In those four meetings, Nadeau presented a systematic approach for manufacturers and distributors to use in marketing more effectively.

The approach is based on research Nadeau's company conducts for multiple industries. Nadeau's company has been researching manufacturer-distributor relations in the truck equipment industry since 1996. The research identified that neither manufacturers nor distributors were particularly pleased with the relationship but that, in all likelihood, no one was going to do anything about it. The research also discovered that manufacturers and distributors do not share a common view of industry conditions.

“If you don't share a common view of conditions in the industry, how do you put together a plan for moving forward?” Nadeau asked.

In 2002, the company supplemented its original research by looking at the costs associated with the relationship. The National Truck Equipment Association participated in almost every phase of the research, Nadeau said.

His research indicates that:

The working relationships of most manufacturers and distributors lack clearly defined goals and plans. “Without agreement on future of the industry, you wind up with goals that are volume focused, instead of customer focused, and the profitability of both parties suffers,” Nadeau said.

Roles and responsibilities in the working relationship of manufacturers and distributors tend to be unclear.

Manufacturers and distributors do not trust one another.

Not alone

Nadeau's research included 3,500 manufacturers and distributors. Across multiple industries involving manufacturers and distributors, the findings were the same.

During the time the core of the research was being conducted (1996-1998), sales in the truck equipment industry were strong. The response to Nadeau's findings was apathy.

“You were riding a bubble,” Nadeau said. “You were making money, and no one wanted to do anything about manufacturer-distributor relations.”

Nadeau continued to research the subject, this time looking at the barriers to improving manufacturer-distributor relations. With input from 750 manufacturers and 500 distributors, Nadeau concluded that poor relationships between manufacturers and distributors were affecting profits.

Costs mount up

The current state of manufacturer-distributor relations is expensive for both parties. Poor coordination between manufacturers and distributors results in not having the right product in the right place at the right time and with the right paperwork.

People waste time on the phone or within the company researching where something is and what went wrong.

Companies pay extra for special overnight deliveries.

Everyone wastes time waiting.

The customer questions the professionalism.

Money is tied up in inventory stocking things that aren't selling.

“If the manufacturer and distributor had developed a plan based on what is really happening in the industry, you would have the right stuff. As a result, you would have fewer mistakes, and the UPS guy wouldn't be here every day.”

Cost: 2% of gross sales

The amount of time people spend fixing mistakes, expediting orders, trying to get rid of excess inventory, and waiting for the right equipment or materials to show up was 1.987% of gross sales, Nadeau said.

“A 2% impact on a company that has a 5% net margin means that 40% of your net profitability goes out the window because your resources are being consumed by fixing mistakes, expediting orders, holding inventory no one will ever want, and waiting for the right stuff to show up,” Nadeau said. “Manufacturers and distributors will bicker with each other for nickel margin concessions on gross margin — which is insignificant. The margin concession stuff is easy and fun, but you get rich taking the waste out of the distribution channel.”

Nadeau pointed out that these inefficiencies cost a $30-million manufacturer $600,000 in profits each year if the company's net margin is 10%. The costs also hurt distributors. A $10-million distributor operating on a 5% net margin makes $500,000 per year. But profits could be $700,000 if it were not for these inefficiencies. Combine what the manufacturer and distributor lose together, and almost $1 million could be saved by working together more effectively, according to Nadeau.

“I'm trying to build an argument for those people who claim they just don't have the money to do anything about it,” Nadeau said. “If you are willing to just throw money away, why not take a one-time hit? Especially distributors — anything that affects the flow of net dollars to the bottom line kills you.”

Trying to agree

Nadeau says the challenge is to get manufacturers who are volume focused and manufacturers who are margin focused to agree on what is happening in the industry and to develop mutually beneficial goals.

Manufacturers and distributors can have discussions, but Nadeau believes such meetings should have a formal structure or process to go through so that manufacturers and distributors do not simply complain about each other or treat symptoms of the problem.

“The biggest barrier is not the economy or a lack of trust. It is your thinking,” Nadeau said. “Over time, you build up mental models about your industry — what the customer needs, how you should compete, and all those other things that eventually become wrong and out of synch with the realities of the market. Since no one ever wants to forsake their belief system, you discount anyone who tries to challenge your beliefs. As an outsider, I had to develop a system to challenge your own beliefs. The only belief system that really matters is that of the customer.

“I still get lambasted by manufacturers when I say that the distributor is not his customer. The distributor is a strategic channel partner.

“The customer is the only one who defines the value proposition. Customers tell you what they want, how they want it configured, when they want it delivered, the services they want, and some indication as to how much they want to pay. You may think that all the customer wants is low price, but how many of your customers drive Yugos and buy polyester golf shirts at Wal-Mart? Price is not the most important variable. Price is where sales people go when they have lost touch with what the customer wants.”

How to compete

In an industry such as truck equipment, Nadeau says, the major players produce good products at an inexpensive price. If everyone is cheap, and everyone is good, the pressure is on manufacturers and distributors to develop other ways to set themselves apart.

“The only one who wins in this situation is the customer,” Nadeau said. “If your margins are in the toilet, you have to shift the delivery of value — and not all customers are going to define value the same way.”

In the early phase of an industry, its manufacturers and distributors have clear jobs — manufacturers and distributors provide market coverage.

“Distributors are talking brochures,” Nadeau said. “Show them the pictures, and tell them about features and benefits. But what happens when the customer says, ‘You are all cheap, you are all good, and I know more about the product than you do because I have been online 12 hours researching it, and I can buy it anywhere in the world.’? You have to change your approach.”

Resisting change

Nadeau outlined several reason why manufacturers and distributors resist changing the way they do business.

Success. When companies have been successful, they have a reason to continue doing things the way they have in the past.

Unchallenged thinking. Some believe that things will simply work out. But as Nadeau pointed out, hope is not a strategy.

Unwillingness to accept the facts. “Manufacturers and distributors need to work together as a team to learn more and more about your mutual customer,” Nadeau said.

Firing your customers

Approximately 5% of all customers are totally focused on price, according to Nadeau.

“From now on, you are to refer to them as margin-sucking weasels,” he said. “When you have identified a margin-sucking weasel, you either have to change the way you do business with them or else exit that market segment. There are a lot of bad customers out there, and the smart businesses send these customers to their less sophisticated competitors.”

Focus on:

Who is the customer?

How does the customer define value?

How should you compete in your industry?

What is the role of the manufacturer-distributor working relationship?

How should those relationships be managed?

What's next?

The NTEA manufacturer-distributor relations initiative is a multi-step process intended to make both groups more efficient and profitable.

“The only way we could help the industry was to bring people together and have an exchange of ideas,” Tedesco said. “We felt the NTEA board should take ownership and leadership of this project. When we looked at other industries as well as our own, we saw a lack of trust. We saw a lot of ingredients that were not healthy and did nothing to improve the relationship between manufacturers and distributors.”

The first phase included the four regional meetings in order to build grass-roots interest in such an initiative. Based on the response, NTEA will conduct additional meetings this year for those who did not attend one of the first four.

“We felt we needed to do this in phases,” Tedesco said. “The intent of Phase 1 was to improve communications between manufacturers and distributors.”

Phase 2 is still being formulated, but the idea will be to move manufacturers and distributors from communicating to cooperating. NTEA is considering a one-day strategic planning session for a fee. The session might involve manufacturers who bring in their top distributors to be guided through the process of developing goals and plans based on what is happening in the industry.

“You will walk out of this session with specific goals and plans for your product,” Nadeau said.

This will include topics such as:

Define how the goals are to be achieved.

Determine how existing customers will be protected from migrating to another source of supply.

Learn how to take business away from competitors.

Explain how to draw new customers into the market.

Create a strategy that will make it difficult for competitors to duplicate your actions.

“There is no tooth fairy,” Nadeau said. “The quick fix will never happen. But from that constant change come opportunities.”

“Where this goes is all up to us as members,” Tedesco said. “The amount of resources the NTEA devotes to this will be based on interest and momentum.”

“The goal is to start with a few companies — companies that are thought leaders,” Nadeau said. “And they are beginning to emerge.”